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Today's Buy Opportunity: Seaspan

Why we're recommending Seaspan.

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Americans love their stuff. We're a nation of consumers, and much of what we buy -- electronics, clothes, toys, sports equipment, household goods, etc. -- is manufactured outside our shores, particularly in China. Last year we imported more than $1.5 trillion worth of hard goods, enough for almost $5,000 for every man, women and child. While that sum was down from $2.1 trillion in 2008, our thirst for merchandise has rebounded 27% so far this year, according to the U.S. Census Bureau. Even as our savings rate creeps higher (now more than 6% -- far higher than a couple of years ago) we still want the next gadget from Apple, the latest pair of sneakers from Skechers, and the new version of Monopoly from Hasbro. Most of these items are made in Asia and shipped to the U.S. across the open seas.

China, the world's second-largest economy and home to many of the manufacturing centers churning out the goods we buy, is 7,000 miles away from the United States' west coast. We need ships to move those smartphones and teddy bears from the Chinese coast to U.S. retailers' shelves. Big ships.

That's what Seaspan(NYSE: SSW) provides to some of the largest shipping companies in the world. Not a bulk commodity shipper like DryShips(Nasdaq: DRYS) or Frontline(NYSE: FRO), the famous Baltic Dry Index is practically meaningless to Seaspan. The Hong Kong-based company (with a management team located in Canada) contracts out its fleet of 53 container ships (massive ships carrying those modular containers on their decks, stuffed with hard goods) and charges hefty day rates in return. If you want to see where these ships are steaming to, head over to Seaspan's fleet page to check out its GPS tracker.

Fast facts on Seaspan

Market capitalization

$742 million

Enterprise value

$3.43 billion

Industry

Marine

Headquarters

Marshall Islands

No. of ships (active / contracted)

53 / 69

Dividend yield

4.6%

Source: Seaspan; Capital IQ, a division of Standard & Poor's.

3 reasons to jump aboard this shipAt today's $10 stock price, Seaspan looks like a good opportunity to earn dividends and capital appreciation for investors. And who doesn't want to say they own a shipping company at that upcoming Labor Day party? Your friends will dub you Mr. or Mrs. Onassis (with apologies to both to the late Aristotle and Jackie).

International trade depends on shippers. 90% of dry cargo (non-commodity goods) will move across the oceans in container ships like those Seaspan leases out to its clients. After a disastrous 2008, global trade has been creeping back, and indications this year suggest that container shipping demand is looking up, while supply is slacking a bit. That's good news for the rates Seaspan can charge.

As trade goes, so do shippers, and Seaspan is one of the strongest available for investors, considering that only about 5% of shippers are publicly traded. Seaspan provides the ship and the crew, while its leasees pay for daily voyage expenses, including port and fuel fees. The company's fleet of 69 container ship (53 on the ocean and another 16 coming over the next 21 months) is fully contracted out to eight of the largest shippers in the world. The fleet's average age is only four years, yet these ships will be steaming across the seas for years to come, generating plenty of greenbacks for shareholders.

Boatloads of cash flow. Before Seaspan takes on another ship, it contracts out an agreement with a lessee for a determined time period and rate. And while clients can try to break the agreement (at the risk of their shipping reputation), Seaspan has done an admirable job of not budging much on terms, even during the financial crisis. Over the last three fiscal years, it grew sales and cash available to shareholders by more than 30%, while its operating fleet expanded by just 22%. The company carries a heavy chunk of debt (typical for this industry), but as long as it has boats on the water, it will be able to generate enough cash to cover its interest expenses (this year, $10 in operating profits for every $1 in interest expense).

Dividends ahoy, mateys! Finally, we get to a key reason why I like Seaspan as an investment for almost any investor: dividends. The company recently increased its quarterly payment 25% to $0.125 per share, or $0.50 per share annually. Yet this is a far cry from the $0.475 quarterly payout management delivered to shareholders during 2008, before it laudably sliced that dividend to preserve cash. When the full fleet is in place by 2013, Seaspan's management team expects to deliver $500 million in operating profits and $300 million in cash available to shareholders. With history as our guide, we should see this incentivized management team kick out at least $1 in dividends, and perhaps close to $1.50 in a few years. That will bode well not just for dividend seekers, but also for a stock that could fetch $15 by then.

Some choppy waters to navigateThere's a lot to like with Seaspan, but it certainly faces choppy seas that could rock the boat a bit. (What stock doesn't?)

As I mentioned, the company carries plenty of debt. If it wants to add to its fleet after 2013, it will need to finance additional ship purchases with either share issuances or even more debt. Cash flows cover the interest expense now, but at some point before repayments start coming due in 2015, the company will need to roll over or pay down its debt load. Also, within a few years, two major Chinese shippers will represent 70% of contracted revenue. That's huge concentration sitting in the hands of what is essentially the Chinese government. So far, it's been smooth sailing with the Chinese shippers that outsource some of their shipping needs to Seaspan, but 70% is still a significant chunk of the company's clientele.

The Foolish bottom lineStill, there's enough upside with dividends and capital appreciation potential to make Seaspan a small slice of your diversified stock portfolio. In Hidden Gems, we've targeted a 1% allocation guideline for our small-cap portfolio, which gives us a little skin in the game to watch (and profit) from what happens with Seaspan on the open seas. Full steam ahead!

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Andy Cross is a co-advisor of Motley Fool Hidden Gems and an associate advisor of Motley Fool Stock Advisor. He does not own shares of any company mentioned. The Motley Fool owns shares in Seaspan. Apple and Hasbro are Motley Fool Stock Advisor recommendations. The Motley Fool has a disclosure policy.